PARK AEROSPACE CORP (PKE)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

General:

Park Aerospace Corp. (“Park” or the “Company”) is an aerospace company which develops and manufactures solution and hot-melt advanced composite materials used to produce composite structures for the global aerospace markets. Park’s advanced composite materials include film adhesives and lightning strike protection materials. Park offers an array of composite materials specifically designed for hand lay-up or automated fiber placement (AFP) manufacturing applications. Park’s advanced composite materials are used to produce primary and secondary structures for jet engines, large and regional transport aircraft, military aircraft, Unmanned Aerial Vehicles (UAVs commonly referred to as “drones”), business jets, general aviation aircraft and rotary wing aircraft. Park also offers specialty ablative materials for rocket motors and nozzles and specially designed materials for radome applications. As a complement to Park’s advanced composite materials offering, Park designs and fabricates composite parts, structures and assemblies and low volume tooling for the aerospace industry. Target markets for Park’s composite parts and structures (which include Park’s proprietary composite SigmaStrut™ and AlphaStrut™ product lines) are, among others, prototype and development aircraft, special mission aircraft, spares for legacy military and civilian aircraft and exotic spacecraft.

The Company’s fiscal year is the 52- or 53-week period ending the Sunday nearest to the last day of February. The 2025, 2024, and 2023 fiscal years ended on March 2, 2025, March 3, 2024, and February 26, 2023, respectively. The 2025 and 2023 fiscal years each consisted of 52 weeks and the 2024 fiscal year consisted of 53 weeks. Unless otherwise indicated in this Discussion and Analysis, all references to years and quarters in this Discussion and Analysis are to the Company’s fiscal years and fiscal quarters, and all annual and quarterly information in this Discussion and Analysis is for such fiscal years and quarters, respectively.

2025 Financial Overview

On May 19, 2024, the Company’s manufacturing facilities in Newton, Kansas were damaged by a strong storm which transitioned the area.  None of the Company’s manufacturing lines or equipment were damaged by the storm.  The roofs on the facilities were damaged along with specialty HVAC units used to control the temperature and humidity in certain manufacturing, laboratory and research and development areas. Repairs are substantially completed. The storm had limited impact on the Company’s production lines. Remaining repairs are scheduled to be completed in the first quarter of 2026. The Company recorded a charge of $1.1 million in 2025 related to the damage and related repair and downtime costs.

The Company's total net sales worldwide in 2025 were 11% higher than in 2024. The increase in sales was primarily driven by an increase in sales in the military and commercial aircraft markets and, to a lesser extent, higher sales in the business aircraft market, while sales to each of the other markets the Company serves were relatively even with the prior year sales levels.

The Company’s gross profit margin, measured as a percentage of sales, decreased to 28.4% in 2025 from 29.5% in 2024. A less favorable sales mix and higher labor and overhead costs due to ramping up of manufacturing capacity in anticipation of customer program volume increases as well as higher depreciation more than offset the increase in sales.

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The Company’s earnings from operations in 2025, as a percentage of sales, were 15.1% compared to 15.0% in 2024, primarily as a result of lower selling, general and administrative expenses which offset the lower gross profit margin noted above. The lower selling, general and administrative expenses, as a percentage of sales, were due to higher legal fees in 2024 as a result of shareholder activism defense costs, costs incurred in 2024 to settle an insurance claim as a result of the bankruptcy of the insurer, lower incentive compensation expense and an additional week of expenses included in 2024. The Company’s net earnings from operations in 2025 were 7% higher than in 2024, primarily due to an 11% increase in sales, and higher interest income in 2025 offset by the $1.1 million storm damage charge, higher costs of sales referenced above, higher selling, general and administrative costs and higher tax expense in 2025 due to a provision recorded for undistributed foreign earnings. The increase in the 2025 tax rate compared to the 2024 tax rate primarily resulted from a deferred tax provision recorded in the fourth quarter of fiscal 2025 on unrepatriated foreign earnings offset by a higher benefit from the reduction in uncertain tax positions in 2025 as compared to 2024.

The Company continues to experience inflation in costs of raw materials and supplies, freight costs and other costs and expenses. The impact of inflation on the Company’s profits has been partially mitigated by the Company’s ability to adjust pricing for a large portion of its sales to pass the impact of inflation through to its customers. The Company may also experience increasing costs resulting from the imposition of duties, tariffs, and similar governmental charges by the United States and certain foreign jurisdictions on the products of its customers and suppliers.

Programs in which the Company participates as a supplier are, in some cases, experiencing supply chain issues from other suppliers to the programs that could result in delays in production for certain customers of the Company. These issues may be exacerbated by trade conflicts that restrict the transfer of funds or impose import and export controls on the Company’s products or supply chain inputs. The Company’s sales could also be impacted by these supply chain challenges to the extent that its customers are experiencing them from their other suppliers.

While the wars in Ukraine and the Middle East have had a negative impact on the Company’s results of operations due to delayed shipments, the Company may experience an increase in future sales due to increases in spending worldwide on missile defense systems and other defense programs. The Company does not have any significant customers in Russia or Ukraine but does have customers in Israel. The Company has experienced some increases to raw material costs from overseas suppliers due to the impacts of the wars in Ukraine and the Middle East.

The Company has a number of long-term contracts pursuant to which certain of its customers, some of which represent a substantial portion of the Company’s revenue, place orders. Long-term contracts with the Company’s customers are primarily requirements based and do not guarantee quantities. An order forecast is generally agreed concurrently with pricing for any applicable long-term contract. This order forecast is then typically updated periodically during the term of the underlying contract. Purchase orders are generally received more than three months in advance of delivery.

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Results of Operations:

2025 Compared to 2024

Net Sales

The Company’s total net sales worldwide in 2025 were 11% higher than in 2024. Higher sales in 2024 were primarily driven by increased sales in the military, commercial aerospace and business aircraft markets.

Gross Profit

The Company’s gross profit margin, measured as a percentage of sales, decreased to 28.4% in 2025 from 29.5% in 2024. The decrease in gross margin was primarily due to a less favorable product mix and higher labor and overhead costs due to ramping up manufacturing capacity in anticipation of customer program volume increases, as well as higher depreciation expense.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $0.1 million, or 1%, during 2025 compared to 2024. Such expenses, measured as percentages of sales, were 13.3% and 14.6% during 2025 and 2024, respectively.

The increase in selling, general and administrative expenses in 2025 was primarily due to higher salaries and fringe benefits as well as higher travel expenses, professional fees, and research and development expenses. These increases were offset by lower legal expenses in 2025 as well as lower incentive compensation and stock option expense and costs incurred in 2024 for shareholder activist defense costs and to settle an insurance claim as the result of the bankruptcy of an insurer and the additional week in 2024 compared to 2025, which resulted in higher fixed expenses in 2024.

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Earnings from Operations

For the reasons set forth above, the Company’s earnings from operations were $9.4 million for 2025 compared to earnings from continuing operations of $8.4 million for 2024.

Storm Damage Charge

On May 19, 2024, the Company’s manufacturing facilities in Newton, Kansas were damaged by a strong storm which moved through the area.  None of the Company’s manufacturing lines or equipment were damaged by the storm.  Although the building structures are secure, the roofs on two of the three buildings in the Company’s Newton, Kansas campus needed significant repairs and the roof on one building needed to be replaced.  Also, multiple specialty HVAC units were damaged or destroyed.  These specialty HVAC units are necessary to control the temperature and humidity in certain manufacturing areas, quality laboratories and R&D laboratories, as required by certain specifications and certifications the Company is subject to.  The Company has remediated much of the damage and is scheduled to complete the repairs in the first quarter of 2026. The Company recorded a charge of $1.1 million in 2025 related to the damage and related repair and downtime costs.

Interest and Other Income/Expense

Interest and other income were $1.2 million in 2025 compared to $1.1 million in 2024. Higher weighted average interest rates in 2025 were offset by lower levels of marketable securities in 2025 due partially to share repurchases of $4.2 million in 2025 as well as a transition tax installment payment of $4.2 million made in the second quarter of 2025 related to the one-time transition tax on deemed repatriated earnings of non US subsidiaries recorded in fiscal 2018. During 2025 and 2024, the Company earned interest income principally from its investments, which were primarily in short-term instruments and money market funds.

Income Tax Provision

The Company’s effective income tax rate was 38.1% for 2025 compared to an effective rate of 20.8% for 2024. The increased rate was due primarily to a deferred tax provision of $2.1 million recorded in the fourth quarter of fiscal 2025 on unrepatriated foreign earnings that the Company had previously considered to be indefinitely reinvested. Although the Company is currently involved in discussions with Asian industrial conglomerates regarding potential Asian-based manufacturing joint ventures, the Company would consider contributing certain of its intellectual property to such joint ventures but would consider contributing only minimal capital to such joint ventures. Other than such potential joint ventures, the Company is not currently involved in any activities which would likely lead to the Company’s investment of such funds overseas. As a result, the Company determined that it is unlikely that opportunities to invest these funds overseas will be realized in the foreseeable future and, therefore, the Company has provided for the potential repatriation of such funds currently held by its Singapore subsidiary. This increase in rate was offset by the U.S. federal rate and state income tax reductions in uncertain tax positions. The benefits from the reductions in 2025 and 2024 were $1.1 million and $0.6 million, respectively, related to the expirations of statutes of limitations on tax positions taken in prior years regarding the taxability of funds repatriated from the Company’s subsidiary in Singapore and to the expiration of statutes of limitations related to state throw-back rates.

Net Earnings from Operations

The Company’s net earnings from continuing operations for 2025 were $5.9 million compared to $7.5 million in 2024. As noted above, net earnings in 2025 included a $1.1 million charge related to storm damage incurred in May 2024 as well as a tax charge of $2.1 million for deferred taxes on undistributed foreign earnings. These charges were offset by a tax benefit from reduction in uncertain tax positions while net earnings in 2024 included shareholder activist defense costs, a charge related to the modification of previously issued stock options, legal costs stemming from the settlement of an insurance claim due to the bankruptcy of an insurance carrier and recruiting fees, partially offset by the tax benefit from the reduction in uncertain tax positions.

Basic and Diluted Earnings Per Share

Basic and diluted earnings per share for 2025 were $0.29 compared to basic and diluted earnings per share for 2024 of $0.37. The lower earnings per share in 2025 reflects the impact of the storm damage charge as well as the tax charge related to undistributed foreign earnings. These decreases were partially offset by higher sales in 2025 and a higher tax benefit from the reduction in uncertain tax positions in 2025 compared to 2024.

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2024 Compared to 2023

Net Sales

The Company’s total net sales worldwide in 2024 were 4% higher than in 2023. Higher sales in 2024 were primarily driven by increased sales in the military markets.

Gross Profit

The Company’s gross profit margin, measured as a percentage of sales, decreased to 29.5% in 2024 from 30.5% in 2023. The decrease in gross margin was primarily due to higher costs for labor, employee benefits, depreciation, utilities, property taxes and other items, partially offset by a favorable sales mix and higher pricing.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $1.6 million, or 25%, during 2024 compared to 2023. Such expenses, measured as percentages of sales, were 14.6% and 12.1% during 2024 and 2023, respectively.

The increase in selling, general and administrative expenses in 2024 was primarily due to shareholder activist defense costs in 2024, higher research and development costs, higher stock option expense due to the modification of previously granted stock options, costs to settle an insurance claim as the result of the bankruptcy of an insurer, higher recruiting fees, higher incentive compensation and the additional week in 2024 compared to 2023, which resulted in higher fixed expenses.

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Earnings from Operations

For the reasons set forth above, the Company’s earnings from operations were $8.4 million for 2024 compared to earnings from continuing operations of $10.0 million for 2023.

Interest and Other Income

Interest and other income were $1.1 million in both 2024 and 2023. Higher weighted average interest rates in 2024 were offset by lower levels of marketable securities in 2024 due to the payment of the special dividend in the first quarter. During 2024 and 2023, the Company earned interest income principally from its investments, which were primarily in short-term instruments and money market funds.

Income Tax Provision

The Company’s effective income tax rate was 20.8% for 2024 compared to an effective rate of 2.7% for 2023. The increased rate was due primarily to the U.S. federal rate and state income tax reductions in uncertain tax positions. The benefits from the reductions in 2024 and 2023 were $574,000 and $2,800,000, respectively, related to the expirations of statutes of limitations on tax positions taken in prior years regarding the taxability of funds repatriated from the Company’s subsidiary in Singapore in 2023 and to the expiration of statutes of limitations related to state throw-back rates in 2024.

Net Earnings from Operations

The Company’s net earnings from continuing operations for 2024 were $7.5 million compared to $10.7 million in 2023. As noted above, net earnings in 2024 included shareholder activist defense costs, a charge related to the modification of previously issued stock options, legal costs stemming from the settlement of an insurance claim due to the bankruptcy of an insurance carrier and recruiting fees, partially offset by the tax benefit from the reduction in uncertain tax positions. The 2023 earnings included the benefit from the reduction in uncertain tax positions of $2.8 million.

Basic and Diluted Earnings Per Share

Basic and diluted earnings per share for 2024 were $0.37 compared to basic and diluted earnings per share for 2023 of $0.52. The lower earnings per share in 2024 reflects the impact of the higher costs in 2024 and the tax benefit from the reduction in uncertain tax positions in 2023.

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Liquidity and Capital Resources:

Cash and Marketable Securities

The Company believes it has sufficient liquidity to fund its operating activities for the 12 months from the date of the filing of this Form 10-K Annual Report and for the foreseeable future thereafter.

The change in cash and marketable securities at March 2, 2025 compared to March 3, 2024 was primarily the result of stock repurchases of $4.3 million in the second and third quarters of 2025, as well as a transition tax payment of $4.2 million made in the second quarter of 2025. The significant changes in cash provided by operating activities were as follows:

In addition, the Company paid $10.1 million and $30.6 million in cash dividends during 2025 and 2024, respectively.

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Working Capital

Working capital at March 2, 2025 decreased $8.2 million compared to March 3, 2024. Decreases in cash and cash equivalents and marketable securities and higher current income taxes payable were partially offset by higher inventories and accounts receivable, as well as lower accounts payable.

The Company's current ratio (the ratio of current assets to current liabilities) was 9.7 to 1 at March 2, 2025 compared to 10.2 to 1 at March 3, 2024.

Cash Flows

During 2025, the Company's net earnings before non-cash storm damage charges, depreciation and amortization, stock-based compensation, provision for deferred income taxes, loss on sales of marketable securities, amortization of bond premium and gain on sale of fixed assets, were $11.3 million compared to $11.1 million in fiscal 2024 and $12.6 million in fiscal 2023. Such earnings were decreased by changes in operating assets and liabilities of $6.6 million, $6.7 million and $6.1 million in fiscal 2025, 2024 and 2023, respectively. This resulted in $4.7 million, $4.4 million and $6.5 million of cash provided by operating activities from continuing operations in fiscal 2025, 2024 and 2023, respectively. During 2025, the Company expended $0.9 million for the purchase of property, plant and equipment compared to $0.6 million during 2024, and $1.0 million in 2023. Proceeds from the sale and maturities of marketable securities, net of purchases of marketable securities, were $24.9 million, $32.0 million and $(6.0) million in 2025, 2024 and 2023, respectively. The Company paid $10.1 million, $30.6 million and $8.2 million in cash dividends in 2025, 2024 and 2023, respectively. The 2024 dividends paid included a special dividend of $20.5 million paid in the first quarter of that year.

Other Liquidity Factors

On December 22, 2017, the U.S. government enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (“TCJA” or “Tax Act”) and significantly revised U.S. corporate income tax by, among other things, lowering corporate income tax rates, imposing a one-time transition tax on deemed repatriated earnings of non-U.S. subsidiaries, and implementing a territorial tax system. As a result of the Tax Act, the Company recorded taxes payable to be paid in installments over eight years. The remaining balance of these installment payments, as of March 2, 2025, was approximately $5.3 million to be paid in the second quarter of 2026.

The Company believes that its existing cash, cash equivalents and marketable securities, and cash flow from operations will be sufficient to fund necessary capital expenditures and operating cash requirements for at least the next 12 months from the date of the filing of this Form 10-K Annual Report. The Company further believes that its consolidated balance sheet and financial position are very strong.

Contractual Obligations:

The Company's contractual obligations and other commercial commitments to make future payments under contracts, such as lease agreements, consist only of operating lease commitments, commitments to purchase raw materials and commitments to purchase equipment, as described in Note 9 of the Notes to Consolidated Financial Statements included elsewhere in this report. In March 2025, the Company entered into an agreement with a supplier, ArianeGroup SAS, under which the Company would advance funds against future purchases. The agreement requires payments of €4,587 over three years, of which €1,376 was paid in April 2025 (actual cost of $1,569), €1,834 (approximately $2,055 based on May 9, 2025 exchange rates) is due in the first quarter of fiscal 2027 and €1,376 (approximately $1,541 based on May 9, 2025 exchange rates) is due in the first quarter of fiscal 2028. The Company has no other long-term debt, capital lease obligations, unconditional purchase obligations or other long-term obligations, standby letters of credit, guarantees, standby repurchase obligations or other commercial commitments or contingent commitments, other than two standby letters of credit in the total amount of $0.1 million to secure the Company's obligations under its workers’ compensation insurance program.

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Environmental Matters:

The Company is subject to various federal, state and local government and foreign government requirements relating to the protection of the environment. The Company believes that, as a general matter, its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and that its handling, manufacture, use and disposal of hazardous or toxic substances are in accord with environmental laws and regulations. However, mainly because of past operations of the Company’s former Electronics Business and operations of predecessor companies, which were generally in compliance with applicable laws at the time of the operations in question, the Company, like other companies engaged in similar businesses, is a party to claims by government agencies and third parties and has incurred remedial response and voluntary cleanup costs associated with environmental matters. Additional claims and costs involving past environmental matters may continue to arise in the future. It is the Company's policy to record appropriate liabilities for such matters when remedial efforts are probable and the costs can be reasonably estimated.

In 2025, 2024 and 2023, the Company incurred approximately $37,000, $29,000 and $14,000, respectively, for remedial response and voluntary cleanup costs and related legal fees, and the Company received, or expects to receive, reimbursement pursuant to general liability insurance coverage for approximately $37,000, $29,000 and $14,000, respectively, of such amounts. While annual environmental remedial response and voluntary cleanup expenditures, including legal fees, have generally been constant from year to year, with increases over time, the Company expects it will be able to fund such expenditures from cash flow from operations. The timing of expenditures depends on a number of factors, including regulatory approval of cleanup projects, remedial techniques to be utilized and agreements with other parties. At March 2, 2025 and March 3, 2024, there were no amounts recorded in accrued liabilities for environmental matters.

Management does not expect that environmental matters will have a material adverse effect on the liquidity, capital resources, business, consolidated results of operations or consolidated financial position of the Company. See Note 10 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this report for a discussion of the Company's contingencies, including those related to environmental matters.

Critical Accounting Policies and Estimates:

The following information is provided regarding critical accounting policies that are important to the Consolidated Financial Statements and that entail, to a significant extent, the use of estimates, assumptions and the application of management's judgment.

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General

The Company’s Discussion and Analysis of its Financial Condition and Results of Operations are based upon the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these Consolidated Financial Statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to sales allowances, inventories, valuation of long-lived assets, income taxes, restructurings, and employee benefit programs. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements.

Recently Adopted Accounting Pronouncement

See Note 13 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report for a discussion of the Company’s recently adopted accounting pronouncements.

Revenue Recognition

The Company recognizes revenue when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the providing entity expects to be entitled in exchange for those goods or services. We recognize revenue when all of the following criteria are met: (1) we have entered into a binding agreement, (2) the performance obligations have been identified, (3) the transaction price to the customer has been determined, (4) the transaction price has been allocated to the performance obligations in the contract, and (5) the performance obligations have been satisfied. The majority of the Company’s shipping terms define the performance obligation to be satisfied upon shipment.

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Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. The Company writes down its inventory for estimated obsolescence or unmarketability based upon the age of the inventory and assumptions about future demand for the Company’s products and market conditions.

Valuation of Long-Lived Assets

The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. In addition, the Company assesses the impairment of goodwill at least annually. Important factors that could trigger an impairment review include, but are not limited to, significant negative industry or economic trends and significant changes in the use of the Company’s assets or strategy of the overall business.

Income Taxes

As part of the processes of preparing its consolidated financial statements, the Company is required to estimate its income taxes payable in each of the jurisdictions in which it operates. This process involves estimating the actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s Consolidated Balance Sheets. Deferred income taxes are provided for temporary differences in the reporting of certain items, such as depreciation and undistributed earnings of foreign subsidiaries, for income tax purposes compared to financial accounting purposes. In evaluating the Company’s ability to recover the deferred tax assets within the jurisdiction from which they arise, all positive and negative evidence is considered, including the scheduled reversal of deferred tax liabilities, projected future taxable income, tax planning strategies and results of recent acquisitions. If these estimates and assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets, resulting in additional income tax expense in the Company’s Consolidated Statements of Operations, or conversely to further reduce the existing valuation allowance, resulting in less income tax expense. The Company evaluates the realizability of the deferred tax assets and assesses the need for additional valuation allowances quarterly.

Tax benefits are recognized for an uncertain tax position when, in the Company’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more likely than not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances and when new information becomes available. Such adjustments are recognized entirely in the period in which they are identified. The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by the Company. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes its liability for unrecognized tax benefits is adequate. Interest and penalties recognized on the liability for unrecognized tax benefits are recorded as income tax expense.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

General:

Park Aerospace Corp. (“Park” or the “Company”) is an aerospace company which develops and manufactures solution and hot-melt advanced composite materials used to produce composite structures for the global aerospace markets. Park’s advanced composite materials include film adhesives and lightning strike protection materials. Park offers an array of composite materials specifically designed for hand lay-up or automated fiber placement (AFP) manufacturing applications. Park’s advanced composite materials are used to produce primary and secondary structures for jet engines, large and regional transport aircraft, military aircraft, Unmanned Aerial Vehicles (UAVs commonly referred to as “drones”), business jets, general aviation aircraft and rotary wing aircraft. Park also offers specialty ablative materials for rocket motors and nozzles and specially designed materials for radome applications. As a complement to Park’s advanced composite materials offering, Park designs and fabricates composite parts, structures and assemblies and low volume tooling for the aerospace industry. Target markets for Park’s composite parts and structures (which include Park’s proprietary composite SigmaStrut™ and AlphaStrut™ product lines) are, among others, prototype and development aircraft, special mission aircraft, spares for legacy military and civilian aircraft and exotic spacecraft.

The Company’s fiscal year is the 52- or 53-week period ending the Sunday nearest to the last day of February. The 2024, 2023 and 2022 fiscal years ended on March 3, 2024, February 26, 2023 and February 27, 2022, respectively. The 2024 fiscal year consisted of 53 weeks and the 2023 and 2022 fiscal years each consisted of 52 weeks. Unless otherwise indicated in this Discussion and Analysis, all references to years and quarters in this Discussion and Analysis are to the Company’s fiscal years and fiscal quarters, and all annual and quarterly information in this Discussion and Analysis is for such fiscal years and quarters, respectively.

2024 Financial Overview

On February 9, 2023, the Company’s Board of Directors declared a special dividend of $1.00 per share payable April 6, 2023 to shareholders of record at the close of business on March 9, 2023. The total amount of this special dividend was approximately $20.5 million.

The Company's total net sales worldwide in 2024 were 4% higher than in 2023. The increase in sales was primarily driven by an increase in military market sales, while sales to each of the other markets the Company serves were relatively even with the prior year sales levels.

The Company’s gross profit margin, measured as a percentage of sales, decreased to 29.5% in 2024 from 30.5% in 2023. Higher costs for labor, employee benefits, depreciation, utilities, and property taxes more than offset a favorable sales mix and higher pricing.

The Company’s earnings from operations in 2024 were 16% lower than in 2023, primarily as a result of higher selling, general and administrative expenses, including higher incentive payments, as well as higher legal expenses resulting from shareholder defense actions, costs to settle an insurance claim as the result of the bankruptcy of an insurer and higher recruiting fees. The Company’s net earnings from operations in 2024 were 30% lower than in 2023, primarily due to a higher tax rate in 2024 compared to 2023 and the increased costs described above offset by higher interest income. The increase in the 2024 tax rate compared to the 2023 tax rate resulted from a lower benefit from the reduction in uncertain tax positions in 2024 as compared to 2023.

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The Company continues to experience inflation in costs of raw materials and supplies, freight costs and other costs and expenses. The impact of inflation on the Company’s profits has been partially mitigated by the Company’s ability to adjust pricing for a large portion of its sales to pass the impact of inflation through to its customers.

Programs in which the Company participates as a supplier are, in some cases, experiencing supply chain issues from other suppliers to the programs that could result in delays in production for certain customers of the Company. The Company’s sales could be impacted by supply chain challenges its customers are experiencing from other suppliers.

While the wars in Ukraine and the Middle East have had a negative impact on the Company’s results of operations due to delayed shipments, the Company may experience an increase in future sales due to increases in spending worldwide on missile defense systems and other defense programs. The Company does not have any significant customers in Russia or Ukraine but does have customers in Israel. The Company has experienced some increases to raw material costs from overseas suppliers due to the impacts of the wars in Ukraine and the Middle East.

The Company has a number of long-term contracts pursuant to which certain of its customers, some of which represent a substantial portion of the Company’s revenue, place orders. Long-term contracts with the Company’s customers are primarily requirements based and do not guarantee quantities. An order forecast is generally agreed concurrently with pricing for any applicable long-term contract. This order forecast is then typically updated periodically during the term of the underlying contract. Purchase orders are generally received in excess of three months in advance of delivery.

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Results of Operations:

2024 Compared to 2023

Net Sales

The Company’s total net sales worldwide in 2024 were 4% higher than in 2023. Higher sales in 2024 were primarily driven by increased sales in the military markets.

Gross Profit

The Company’s gross profit margin, measured as a percentage of sales, decreased to 29.5% in 2024 from 30.5% in 2023. The decrease in gross margin was primarily due to higher costs for labor, employee benefits, depreciation, utilities, property taxes and other items, partially offset by a favorable sales mix and higher pricing.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $1.6 million, or 25%, during 2024 compared to 2023. Such expenses, measured as percentages of sales, were 14.6% and 12.1% during 2024 and 2023, respectively.

The increase in selling, general and administrative expenses in 2024 was primarily due to shareholder activist defense costs in 2024, higher research and development costs, higher stock option expense due to the modification of previously granted stock options, costs to settle an insurance claim as the result of the bankruptcy of an insurer, higher recruiting fees, higher incentive compensation and the additional week in 2024 compared to 2023, which resulted in higher fixed expenses.

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Earnings from Operations

For the reasons set forth above, the Company’s earnings from operations were $8.4 million for 2024 compared to earnings from continuing operations of $10.0 million for 2023.

Interest and Other Income

Interest and other income were $1.1 million in both 2024 and 2023. Higher weighted average interest rates in 2024 were offset by lower levels of marketable securities in 2024 due to the payment of the special dividend in the first quarter. During 2024 and 2023, the Company earned interest income principally from its investments, which were primarily in short-term instruments and money market funds.

Income Tax Provision

The Company’s effective income tax rate was 20.8% for 2024 compared to an effective rate of 2.7% for 2023. The increased rate was due primarily to the U.S. Federal rate and state income tax reductions in uncertain tax positions. The benefits from the reductions in 2024 and 2023 were $574,000 and $2,800,000, respectively, related to the expirations of statutes of limitations on tax positions taken in prior years regarding the taxability of funds repatriated from the Company’s subsidiary in Singapore in 2023 and to the expiration of statutes of limitations related to state throw-back rates in 2024.

Net Earnings from Operations

The Company’s net earnings from continuing operations for 2024 were $7.5 million compared to $10.7 million in 2023. As noted above, net earnings in 2024 included shareholder activist defense costs, a charge related to the modification of previously issued stock options, legal costs stemming from the settlement of an insurance claim due to the bankruptcy of an insurance carrier and recruiting fees, partially offset by the tax benefit from the reduction in uncertain tax positions. The 2023 earnings included the benefit from the reduction in uncertain tax positions of $2.8 million.

Basic and Diluted Earnings Per Share

Basic and diluted earnings per share for 2024 were $0.37 compared to basic and diluted earnings per share for 2023 of $0.52. The lower earnings per share in 2024 reflects the impact of the higher costs in 2024 and the tax benefit from the reduction in uncertain tax positions in 2023.

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2023 Compared to 2022

Net Sales

The Company’s total net sales worldwide in 2023 were 1% higher than in 2022. Sales in 2023, to each of the markets the Company serves, were relatively even with the prior year sales levels.

Gross Profit

The Company’s gross profit margin, measured as a percentage of sales, decreased to 30.5% in 2023 from 33.4% in 2022. Higher costs for raw materials, supplies, freight, utilities, costs related to the new equipment trials and qualifications and higher waste costs from increased change-over resulting from supply chain challenges and uncertainties led to a decrease in gross margins.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $270,000, or 4%, during 2023 compared to 2022. Such expenses, measured as percentages of sales, were 12.1% and 11.7% during 2023 and 2022, respectively.

Selling, general and administrative expenses in 2023 included $369,000 of stock option expenses compared to $285,000 of such expenses in 2022.

Restructuring Charges

Restructuring charges were nil in 2023 compared to $259,000 in 2022 related to the closure of the Company’s Park Aerospace Technologies Asia, Pte. Ltd. facility located in Singapore.

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Earnings from Operations

For the reasons set forth above, the Company’s earnings from operations were $10.0 million for 2023. The Company’s earnings from continuing operations were $11.4 million for 2022, including the pretax charges of $259,000 for the closure of the facility located in Singapore.

Interest and Other Income

Interest and other income were $1.1 million and $375,000 for 2023 and 2022, respectively. The increase from 2022 was due primarily higher weighted average interest rates. During 2023 and 2022, the Company earned interest income principally from its investments, which were primarily in short-term instruments and money market funds.

Income Tax Provision

The Company’s effective income tax rate of 2.7% for 2023 was due primarily to the U.S. Federal rate and state income taxes, including $214,000 of additional tax due to tax deductions becoming unavailable related to stock options expiring unexercised in the 2023 fiscal year, offset by a reduction in uncertain tax positions related to the expiring statute of limitations of tax positions taken in prior years regarding the taxability of funds repatriated from the Company’s subsidiary in Singapore of $2.8 million. The Company’s effective income tax rate of 28.2% was higher in 2022, due to the lack of the uncertain tax position reduction as occurred in 2023.

Net Earnings from Operations

The Company’s net earnings from continuing operations for 2023 were $10.7 million, including the reduction in uncertain tax positions of $2.8 million and $214,000 of additional tax due to tax deductions becoming unavailable as a result of stock options expiring unexercised. The Company’s net earnings from continuing operations for 2022 were $8.5 million, including the pretax charges of $259,000 for the closure of the facility located in Singapore.

Basic and Diluted Earnings Per Share

Basic and diluted earnings per share for 2023 were $0.52, including the additional tax due to tax deductions becoming unavailable as a result of stock options expiring unexercised and the reduction in uncertain tax positions, compared to basic and diluted earnings per share for 2022 of $0.41, including the pretax charges for the closure of the facility located in Singapore. The net impact of the items described above was to increase basic and diluted earnings per share by $0.13 in 2023 and decrease basic and diluted earnings per share by $0.01 in 2022.

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Liquidity and Capital Resources:

Cash and Marketable Securities

The Company believes it has sufficient liquidity to fund its operating activities for the 12 months from the date of the filing of this Form 10-K Annual Report and for the foreseeable future thereafter.

The change in cash and marketable securities at March 3, 2024 compared to February 26, 2023 was primarily the result of the special dividend of $1.00 per share paid in April 2023, which totaled $20.5 million, stock repurchases of $2.9 million in the second and third quarters of 2024, as well as regular dividends of $10.2 million. The significant changes in cash provided by operating activities were as follows:

In addition, the Company paid $30.6 million and $8.2 million in cash dividends during 2024 and 2023, respectively.

Working Capital

Working capital at March 3, 2024 was lower compared to February 26, 2023. Decreases in cash and cash equivalents and marketable securities, and inventories and increases in accrued expenses and accrued income taxes were partially offset by higher accounts receivable and lower dividends payable and accounts payable.

The Company's current ratio (the ratio of current assets to current liabilities) was 10.2 to 1 at March 3, 2024 compared to 4.4 to 1 at February 26, 2023.

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Cash Flows

During 2024, the Company's net earnings before depreciation and amortization, stock-based compensation, amortization of bond premium and gain on sale of fixed assets, were $11.1 million. Such earnings were decreased by changes in operating assets and liabilities of $6.7 million, resulting in $4.4 million of cash provided by operating activities from continuing operations. During 2024, the Company expended $0.6 million for the purchase of property, plant and equipment compared to $1.0 million during 2023, and the Company paid $30.6 and $8.2 million in cash dividends in 2024 and 2023, respectively. The 2024 dividends paid included a special dividend of $20.5 million paid in the first quarter of 2024.

Other Liquidity Factors

On December 22, 2017, the U.S. government enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (“TCJA” or “Tax Act”) and significantly revised U.S. corporate income tax by, among other things, lowering corporate income tax rates, imposing a one-time transition tax on deemed repatriated earnings of non-U.S. subsidiaries, and implementing a territorial tax system. As a result of the Tax Act, the Company recorded taxes payable to be paid in installments over eight years. The remaining balance of these installment payments, as of March 3, 2024, was approximately $9.5 million to be paid over the next two years.

The Company believes that its existing cash, cash equivalents and marketable securities, and cash flow from operations will be sufficient to fund necessary capital expenditures and operating cash requirements for at least the next twelve months from the date of the filing of this Form 10-K Annual Report. The Company further believes that its consolidated balance sheet and financial position are very strong.

Contractual Obligations:

The Company's contractual obligations and other commercial commitments to make future payments under contracts, such as lease agreements, consist only of operating lease commitments, commitments to purchase raw materials and commitments to purchase equipment, as described in Note 10 of the Notes to Consolidated Financial Statements included elsewhere in this Report. The Company has no other long-term debt, capital lease obligations, unconditional purchase obligations or other long-term obligations, standby letters of credit, guarantees, standby repurchase obligations or other commercial commitments or contingent commitments, other than two standby letters of credit in the total amount of $0.1 million to secure the Company's obligations under its workers’ compensation insurance program.

Environmental Matters:

The Company is subject to various Federal, state and local govern‐ment and foreign government requirements relating to the protection of the environment. The Company believes that, as a general matter, its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and that its handling, manufacture, use and disposal of hazardous or toxic substances are in accord with environmental laws and regulations. However, mainly because of past operations of the Company’s former Electronics Business and operations of predecessor companies, which were generally in compliance with applicable laws at the time of the operations in question, the Company, like other companies engaged in similar businesses, is a party to claims by govern‐ment agencies and third parties and has incurred remedial response and voluntary cleanup costs associated with environmental matters. Additional claims and costs involving past environmental matters may continue to arise in the future. It is the Company's policy to record appropriate liabilities for such matters when remedial efforts are probable and the costs can be reasonably estimated.

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In 2024, 2023 and 2022, the Company incurred approximately $29,000, $14,000 and $13,000, respectively, for remedial response and voluntary cleanup costs and related legal fees, and the Company received, or expects to receive, reimbursement pursuant to general liability insurance coverage for approximately $29,000, $14,000 and $13,000, respectively, of such amounts. While annual environmental remedial response and voluntary cleanup expenditures, including legal fees, have generally been constant from year to year, and may increase over time, the Company expects it will be able to fund such expenditures from cash flow from operations. The timing of expenditures depends on a number of factors, including regulatory approval of cleanup projects, remedial techniques to be utilized and agreements with other parties. At March 3, 2024 and February 26, 2023, there were no amounts recorded in accrued liabilities for environmental matters.

Management does not expect that environmental matters will have a material adverse effect on the liquidity, capital resources, business, consolidated results of operations or consolidated financial position of the Company. See Note 11 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report for a discussion of the Company's contingencies, including those related to environmental matters.

Critical Accounting Policies and Estimates:

The following information is provided regarding critical accounting policies that are important to the Consolidated Financial Statements and that entail, to a significant extent, the use of estimates, assumptions and the application of management's judgment.

General

The Company’s Discussion and Analysis of its Financial Condition and Results of Operations are based upon the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these Consolidated Financial Statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to sales allowances, allowances for doubtful accounts, inventories, valuation of long-lived assets, income taxes, restructurings, contingencies and litigation, and employee benefit programs. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements.

Recently Adopted Accounting Pronouncement

See Note 14 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report for a discussion of the Company’s recently adopted accounting pronouncements.

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Revenue Recognition

The Company recognizes revenue when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the providing entity expects to be entitled in exchange for those goods or services. We recognize revenue when all of the following criteria are met: (1) we have entered into a binding agreement, (2) the performance obligations have been identified, (3) the transaction price to the customer has been determined, (4) the transaction price has been allocated to the performance obligations in the contract, and (5) the performance obligations have been satisfied. The majority of the Company’s shipping terms define the performance obligation to be satisfied upon shipment.

Accounts Receivable

The Company’s accounts receivable are due from purchasers of the Company’s products. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are due within established payment terms and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than established payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the conditions of the general economy and the aerospace industry. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company writes off accounts receivable when they become uncollectible.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. The Company writes down its inventory for estimated obsolescence or unmarketability based upon the age of the inventory and assumptions about future demand for the Company’s products and market conditions.

Valuation of Long-Lived Assets

The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. In addition, the Company assesses the impairment of goodwill at least annually. Important factors that could trigger an impairment review include, but are not limited to, significant negative industry or economic trends and significant changes in the use of the Company’s assets or strategy of the overall business.

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Income Taxes

As part of the processes of preparing its consolidated financial statements, the Company is required to estimate the income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s Consolidated Balance Sheets. Deferred income taxes are provided for temporary differences in the reporting of certain items, such as depreciation and undistributed earnings of foreign subsidiaries, for income tax purposes compared to financial accounting purposes. In evaluating the Company’s ability to recover the deferred tax assets within the jurisdiction from which they arise, all positive and negative evidence is considered, including the scheduled reversal of deferred tax liabilities, projected future taxable income, tax planning strategies and results of recent acquisitions. If these estimates and assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets, resulting in additional income tax expense in the Company’s Consolidated Statements of Operations, or conversely to further reduce the existing valuation allowance, resulting in less income tax expense. The Company evaluates the realizability of the deferred tax assets and assesses the need for additional valuation allowances quarterly.

Tax benefits are recognized for an uncertain tax position when, in the Company’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances and when new information becomes available. Such adjustments are recognized entirely in the period in which they are identified. The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by the Company. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes its liability for unrecognized tax benefits is adequate. Interest and penalties recognized on the liability for unrecognized tax benefits are recorded as income tax expense.

Contingencies and Litigation

The Company is subject to a number of proceedings, lawsuits and other claims related to environmental, employment, product and other matters. The Company is required to assess the likelihood of any adverse judgments or outcomes in these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach, such as a change in settlement strategy in dealing with these matters.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

General:

Park Aerospace Corp. (“Park” or the “Company”) is an aerospace company which develops and manufactures solution and hot-melt advanced composite materials used to produce composite structures for the global aerospace markets.  Park’s advanced composite materials include film adhesives and lightning strike protection materials.  Park offers an array of composite materials specifically designed for hand lay-up or automated fiber placement (AFP) manufacturing applications.  Park’s advanced composite materials are used to produce primary and secondary structures for jet engines, large and regional transport aircraft, military aircraft, Unmanned Aerial Vehicles (UAVs commonly referred to as “drones”), business jets, general aviation aircraft and rotary wing aircraft.  Park also offers specialty ablative materials for rocket motors and nozzles and specially designed materials for radome applications.  As a complement to Park’s advanced composite materials offering, Park designs and fabricates composite parts, structures and assemblies and low volume tooling for the aerospace industry.  Target markets for Park’s composite parts and structures (which include Park’s proprietary composite SigmaStrut™ and AlphaStrut™ product lines) are, among others, prototype and development aircraft, special mission aircraft, spares for legacy military and civilian aircraft and exotic spacecraft.

The Company’s fiscal year is the 52- or 53-week period ending the Sunday nearest to the last day of February. The 2023, 2022 and 2021 fiscal years ended on February 26, 2023, February 27, 2022 and February 28, 2021, respectively. The 2023, 2022 and 2021 fiscal years each consisted of 52 weeks. Unless otherwise indicated in this Discussion and Analysis, all references to years and quarters in this Discussion and Analysis are to the Company’s fiscal years and fiscal quarters, and all annual and quarterly information in this Discussion and Analysis is for such fiscal years and quarters, respectively.

2023 Financial Overview

In 2019, the Company announced the major expansion of its aerospace manufacturing, development and design facilities located at the Newton City-County Airport in Newton, Kansas.  This expansion includes the construction of a manufacturing facility located adjacent to Park’s existing Newton, Kansas facilities.  This facility, which was constructed in part to support a major aerospace customer, includes approximately 90,000 square feet of manufacturing and office space, and essentially doubled the size of Park’s existing Newton, Kansas manufacturing footprint.  The total cost of the expansion was approximately $19.8 million. The expansion is complete and includes new resin mixing and delivery systems, new hot-melt film and tape manufacturing lines, space to accommodate an additional hot-melt tape line or solution treating line, space to accommodate a confidential joint development project with a major aerospace customer, additional slitting capability, significant additional freezer and storage space, an expanded production lab, a new R&D lab and additional office space. Through February 26, 2023, the Company had incurred $19.6 million of costs for the expansion.

On February 9, 2023, the Company’s Board of Directors declared a special dividend of $1.00 per share payable April 6, 2023 to shareholders of record at the close of business on March 9, 2023. The total amount of this special dividend was approximately $20.5 million.

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The Company's total net sales worldwide in 2023 were 1% higher than in 2022. Sales in 2023, to each of the markets the Company serves, were relatively even with the prior year sales levels.

The Company’s gross profit margin, measured as a percentage of sales, decreased to 30.5% in 2023 from 33.4% in 2022. Higher costs for raw materials, supplies, freight, utilities, costs related to the new equipment trials and qualifications and higher waste costs from increased change-over resulting from supply chain challenges and uncertainties led to the decrease in gross margins.

The Company’s earnings from operations in 2023 were 13% lower than in 2022, primarily as a result of higher costs for raw materials, supplies, freight, utilities, costs related to the new equipment trials and qualifications and higher waste costs from increased change-over resulting from supply chain challenges and uncertainties. The Company’s net earnings from continuing operations in 2023 were 27% higher than in 2022, primarily due to higher interest income and a reduction in uncertain tax positions, partially offset by the cost and expense increases mentioned above.

The Company is experiencing inflation in raw materials, supplies, freight costs and other costs and expenses. The impact of inflation on the Company’s profits has been partially mitigated by the Company’s ability to adjust pricing for a large portion of its sales to pass the impact of inflation through to its customers.

With the recovery of the aerospace markets, some companies in the aerospace supply chain have not been fully prepared to ramp up their production as quickly as needed, which has created a risk to the Company of not getting enough raw materials on a timely basis to fully support the Company’s customers’ demands. Delays of shipments of raw materials have impacted the Company’s production level and have caused inefficiencies in the Company’s manufacturing operations. The Company continues to experience supply chain challenges.

Programs that the Company supplies into are, in some cases, experiencing supply chain issues from other suppliers to the programs. The Company’s sales could be impacted by supply chain challenges its customers are experiencing from other suppliers.

The tight labor market has created challenges in hiring personnel. Although the Company feels very positive about its workforce, staffing to proper levels continues to pose challenges for the Company. The Company’s cross-training “Customer Flexibility Program” continues to help the Company to deal with the staffing shortages.

The war in Ukraine has not had a negative material impact on the Company’s results of operations, but the Company has a potential for an increase in future sales due to increases in spending worldwide on missile defense systems and other defense programs. The Company does not have any significant customers in Russia or Ukraine.  The Company has experienced some increases to raw material costs from overseas suppliers due to the impacts of the war in Ukraine.

The Company has a number of long-term contracts pursuant to which certain of its customers, some of which represent a substantial portion of the Company’s revenue, place orders. Long-term contracts with the Company’s customers are primarily requirements based and do not guarantee quantities. An order forecast is generally agreed concurrently with pricing for any applicable long-term contract. This order forecast is then typically updated periodically during the term of the underlying contract. Purchase orders are generally received in excess of three months in advance of delivery.

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Results of Operations:

2023 Compared to 2022

Net Sales

The Company’s total net sales worldwide in 2023 were 1% higher than in 2022. Sales in 2023, to each of the markets the Company serves, were relatively even with the prior year sales levels.

Gross Profit

The Company’s gross profit margin, measured as a percentage of sales, decreased to 30.5% in 2023 from 33.4% in 2022. Higher costs for raw materials, supplies, freight, utilities, costs related to the new equipment trials and qualifications and higher waste costs from increased change-over resulting from supply chain challenges and uncertainties led to a decrease in gross margins.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $270,000, or 4%, during 2023 compared to 2022. Such expenses, measured as percentages of sales, were 12.1% and 11.7% during 2023 and 2022, respectively.

Selling, general and administrative expenses in 2023 included $369,000 of stock option expenses compared to $285,000 of such expenses in 2022.

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Restructuring Charges

Restructuring charges were nil in 2023 compared to $259,000 in 2022 related to the closure of the Company’s Park Aerospace Technologies Asia, Pte. Ltd. facility located in Singapore.

Earnings from Operations

For the reasons set forth above, the Company’s earnings from operations were $10.0 million for 2023. The Company’s earnings from continuing operations were $11.4 million for 2022, including the pretax charges of $259,000 for the closure of the facility located in Singapore.

Interest and Other Income

Interest and other income were $1.1 million and $375,000 for 2023 and 2022, respectively. The increase from 2022 was due primarily higher weighted average interest rates. During 2023 and 2022, the Company earned interest income principally from its investments, which were primarily in short-term instruments and money market funds.

Income Tax Provision

The Company’s effective income tax rate of 2.7% for 2023 was due primarily to the U.S. Federal rate and state income taxes, including $214,000 of additional tax due to tax deductions becoming unavailable related to stock options expiring unexercised in the 2023 fiscal year, offset by a reduction in uncertain tax positions related to the expiring statute of limitations of tax positions taken in prior years regarding the taxability of funds repatriated from the Company’s subsidiary in Singapore of $2.8 million. The Company’s effective income tax rate of 28.2% was higher in 2022, due to the lack of the uncertain tax position reduction as occurred in 2023.

Net Earnings from Operations

The Company’s net earnings from continuing operations for 2023 were $10.7 million, including the reduction in uncertain tax positions of $2.8 million and $214,000 of additional tax due to tax deductions becoming unavailable as a result of stock options expiring unexercised. The Company’s net earnings from continuing operations for 2022 were $8.5 million, including the pretax charges of $259,000 for the closure of the facility located in Singapore.

Basic and Diluted Earnings Per Share

Basic and diluted earnings per share for 2023 were $0.52, including the additional tax due to tax deductions becoming unavailable as a result of stock options expiring unexercised and the reduction in uncertain tax positions, compared to basic and diluted earnings per share for 2022 of $0.41, including the pretax charges for the closure of the facility located in Singapore. The net impact of the items described above was to increase basic and diluted earnings per share by $0.13 in 2023 and decrease basic and diluted earnings per share by $0.01 in 2022.

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2022 Compared to 2021

Net Sales

The Company's total net sales worldwide in 2022 were 16% higher than in 2021 due primarily to the higher sales to commercial aerospace and business aircraft customers resulting from the decreasing impacts of the Pandemic on those markets, partially offset by lower military sales during 2022.

Gross Profit

The Company’s gross profit margin, measured as a percentage of sales, increased to 33.4% in 2022 from 28.5% in 2021. Higher sales and production levels combined with the fixed nature of certain overhead costs led to higher gross margins.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $136,000, or 2%, during 2022 compared to 2021. Such expenses, measured as percentages of sales, were 11.7% and 13.2% during 2022 and 2021, respectively.

Selling, general and administrative expenses in 2022 included $285,000 of stock option expenses compared to $191,000 of such expenses in 2021.

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Restructuring Charges

The Company recorded restructuring charges of $259,000 in 2022 compared to $1.6 million in 2021 related to the closure of the Company’s Park Aerospace Technologies Asia, Pte, Ltd. facility located in Singapore.

Earnings from Continuing Operations

For the reasons set forth above, the Company’s earnings from continuing operations were $11.4 million for 2022, including the pretax charges of $259,000 for the closure of the facility located in Singapore. The Company’s earnings from continuing operations were $5.5 million for 2021, including the pretax charges of $1.6 million for the closure of the facility located in Singapore.

Interest and Other Income

Interest and other income were $375,000 and $1.8 million for 2022 and 2021, respectively. The decrease from 2021 was due primarily to lower average invested cash during the period and lower weighted average interest rates. During 2022 and 2021, the Company earned interest income principally from its investments, which were primarily in short-term instruments and money market funds.

Income Tax Provision

The Company’s effective income tax rate of 28.2% for 2022 was due primarily to the U.S. Federal rate and state income taxes. The Company’s effective income tax rate was higher in 2021, due to unfavorable adjustments to valuation allowances on state tax credits and a higher state effective tax rate in 2021.

Net Earnings from Continuing Operations

The Company’s net earnings from continuing operations for 2022 were $8.5 million, including the pretax charges of $259,000 for the closure of the facility located in Singapore. The Company’s net earnings from continuing operations for 2021 were $5.2 million, including the pretax charges of $1.6 million for the closure of the facility located in Singapore.

Discontinued Operations

On December 4, 2018, the Company completed the sale of its Electronics Business, including manufacturing facilities in Singapore, France, California and Arizona and R&D facilities in Singapore and Arizona, to AGC Inc. for an aggregate purchase price of $145 million in cash, subject to post-closing adjustments for changes in working capital compared to the target net working capital, excluding cash in certain acquired subsidiaries and certain accrued and unpaid taxes of certain acquired subsidiaries. See Note 12, “Discontinued Operations”, of the Notes to Consolidated Financial Statements elsewhere in this Report for additional information on the sale.

The operating results of the Electronics Business are classified, together with certain costs related to the sale, as discontinued operations, net of tax, in the Consolidated Statements of Operations.

The Company’s loss from discontinued operations was lower in 2022 compared to 2021 primarily as a result of exiting the facility in Fullerton, California, previously used in the electronics operations, at the beginning of the third fiscal quarter of 2021.

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Basic and Diluted Earnings Per Share

Basic and diluted earnings per share from continuing operations for 2022 were $0.41, including the pretax charges for the closure of the facility located in Singapore, compared to basic and diluted earnings per share for 2021 of $0.25, including the pretax charges for the closure of the facility located in Singapore. The net impact of the items described above was to decrease basic and diluted earnings per share by $0.01 in 2022 and $0.07 in 2021.

Liquidity and Capital Resources:

Cash and Marketable Securities

The Company believes it has sufficient liquidity to fund its operating activities for the 12 months from the date of the filing of this Form 10-K Annual Report and for the foreseeable future thereafter.

The change in cash and marketable securities at February 26, 2023 compared to February 27, 2022 was primarily the result of positive operating cash flow more than offset by capital expenditures and regular quarterly dividends paid by the Company to its shareholders during 2023 and a number of additional factors. The significant changes in cash provided by operating activities were as follows:

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In addition, the Company paid $8.2 million in cash dividends during 2023 and 2022.

In February 2023, the Company declared a special dividend of $1.00 per share. The Company recorded a dividend payable of $20.5 million at the end of 2023.

Working Capital

Working capital at February 26, 2023 was lower compared to February 27, 2022. Decreases in cash and cash equivalents and marketable securities and increases in accounts payable and dividends payable were partially offset by increases in accounts receivable, inventories and prepaid expenses and other current assets.

The Company's current ratio (the ratio of current assets to current liabilities) was 4.4 to 1 at February 26, 2023 compared to 20.1 to 1 at February 27, 2022.

Cash Flows

During 2023, the Company's net earnings from continuing operations, before depreciation and amortization, stock-based compensation, amortization of bond premium and gain on sale of fixed assets, were $12.6 million. Such earnings were decreased by changes in operating assets and liabilities of $6.1 million, resulting in $6.5 million of cash provided by operating activities from continuing operations. During 2023, the Company expended $1.0 million for the purchase of property, plant and equipment compared to $4.4 million during 2022 and the Company paid $8.2 million in cash dividends in 2023 and 2022.

Other Liquidity Factors

On December 22, 2017, the U.S. government enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (“TCJA” or “Tax Act”) and significantly revised U.S. corporate income tax by, among other things, lowering corporate income tax rates, imposing a one-time transition tax on deemed repatriated earnings of non-U.S. subsidiaries, and implementing a territorial tax system. As a result of the Tax Act, the Company recorded taxes payable to be paid in installments over eight years. The remaining balance of these installment payments, as of February 26, 2023, was approximately $12.6 million to be paid over the next four years.

The Company believes that its existing cash, cash equivalents and marketable securities, and cash flow from operations will be sufficient to fund necessary capital expenditures and operating cash requirements for at least the next twelve months from the date of the filing of this Form 10-K Annual Report. The Company further believes that its consolidated balance sheet and financial position are very strong.

Contractual Obligations:

The Company's contractual obligations and other commercial commitments to make future payments under contracts, such as lease agreements, consist only of operating lease commitments, commitments to purchase raw materials and commitments to purchase equipment, as described in Note 10 of the Notes to Consolidated Financial Statements included elsewhere in this Report. The Company has no other long-term debt, capital lease obligations, unconditional purchase obligations or other long-term obligations, standby letters of credit, guarantees, standby repurchase obligations or other commercial commitments or contingent commitments, other than two standby letters of credit in the total amount of $0.1 million to secure the Company's obligations under its workers’ compensation insurance program.

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Environmental Matters:

The Company is subject to various Federal, state and local government and foreign government requirements relating to the protection of the environment. The Company believes that, as a general matter, its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and that its handling, manufacture, use and disposal of hazardous or toxic substances are in accord with environmental laws and regulations. However, mainly because of past operations of the Company’s former Electronics Business and operations of predecessor companies, which were generally in compliance with applicable laws at the time of the operations in question, the Company, like other companies engaged in similar businesses, is a party to claims by government agencies and third parties and has incurred remedial response and voluntary cleanup costs associated with environmental matters. Additional claims and costs involving past environmental matters may continue to arise in the future. It is the Company's policy to record appropriate liabilities for such matters when remedial efforts are probable and the costs can be reasonably estimated.

In 2023, 2022 and 2021, the Company incurred approximately $14,000, $13,000 and $9,000, respectively, for remedial response and voluntary cleanup costs and related legal fees, and the Company received, or expects to receive, reimbursement pursuant to general liability insurance coverage for approximately $14,000, $13,000 and $9,000, respectively, of such amounts. While annual environmental remedial response and voluntary cleanup expenditures, including legal fees, have generally been constant from year to year, and may increase over time, the Company expects it will be able to fund such expenditures from cash flow from operations. The timing of expenditures depends on a number of factors, including regulatory approval of cleanup projects, remedial techniques to be utilized and agreements with other parties. At February 26, 2023 and February 27, 2022, there were no amounts recorded in accrued liabilities for environmental matters.

Management does not expect that environmental matters will have a material adverse effect on the liquidity, capital resources, business, consolidated results of operations or consolidated financial position of the Company. See Note 11 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report for a discussion of the Company's contingencies, including those related to environmental matters.

Critical Accounting Policies and Estimates:

The following information is provided regarding critical accounting policies that are important to the Consolidated Financial Statements and that entail, to a significant extent, the use of estimates, assumptions and the application of management's judgment.

General

The Company’s Discussion and Analysis of its Financial Condition and Results of Operations are based upon the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these Consolidated Financial Statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to sales allowances, allowances for doubtful accounts, inventories, valuation of long-lived assets, income taxes, restructurings, contingencies and litigation, and employee benefit programs. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements.

Recently Adopted Accounting Pronouncement

See Note 15 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report for a discussion of the Company’s recently adopted accounting pronouncements.

Revenue Recognition

The Company recognizes revenue when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the providing entity expects to be entitled in exchange for those goods or services. We recognize revenue when all of the following criteria are met: (1) we have entered into a binding agreement, (2) the performance obligations have been identified, (3) the transaction price to the customer has been determined, (4) the transaction price has been allocated to the performance obligations in the contract, and (5) the performance obligations have been satisfied. The majority of the Company’s shipping terms define the performance obligation to be satisfied upon shipment.

Accounts Receivable

The Company’s accounts receivable are due from purchasers of the Company’s products. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are due within established payment terms and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than established payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the conditions of the general economy and the aerospace industry. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company writes off accounts receivable when they become uncollectible.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. The Company writes down its inventory for estimated obsolescence or unmarketability based upon the age of the inventory and assumptions about future demand for the Company’s products and market conditions.

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Valuation of Long-Lived Assets

The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. In addition, the Company assesses the impairment of goodwill at least annually. Important factors that could trigger an impairment review include, but are not limited to, significant negative industry or economic trends and significant changes in the use of the Company’s assets or strategy of the overall business.

Income Taxes

As part of the processes of preparing its consolidated financial statements, the Company is required to estimate the income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.  These differences result in deferred tax assets and liabilities, which are included in the Company’s Consolidated Balance Sheets. Deferred income taxes are provided for temporary differences in the reporting of certain items, such as depreciation and undistributed earnings of foreign subsidiaries, for income tax purposes compared to financial accounting purposes. In evaluating the Company’s ability to recover the deferred tax assets within the jurisdiction from which they arise, all positive and negative evidence is considered, including the scheduled reversal of deferred tax liabilities, projected future taxable income, tax planning strategies and results of recent acquisitions. If these estimates and assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets, resulting in additional income tax expense in the Company’s Consolidated Statements of Operations, or conversely to further reduce the existing valuation allowance, resulting in less income tax expense. The Company evaluates the realizability of the deferred tax assets and assesses the need for additional valuation allowances quarterly.

Tax benefits are recognized for an uncertain tax position when, in the Company’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances and when new information becomes available. Such adjustments are recognized entirely in the period in which they are identified. The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by the Company. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes its liability for unrecognized tax benefits is adequate. Interest and penalties recognized on the liability for unrecognized tax benefits are recorded as income tax expense.

Contingencies and Litigation

The Company is subject to a number of proceedings, lawsuits and other claims related to environmental, employment, product and other matters. The Company is required to assess the likelihood of any adverse judgments or outcomes in these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach, such as a change in settlement strategy in dealing with these matters.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

General:

Park Aerospace Corp. (“Park” or the “Company”) is an aerospace company which develops and manufactures solution and hot-melt advanced composite materials used to produce composite structures for the global aerospace markets. Park’s advanced composite materials include film adhesives (undergoing qualification) and lightning strike materials. Park offers an array of composite materials specifically designed for hand lay-up or automated fiber placement (AFP) manufacturing applications. Park’s advanced composite materials are used to produce primary and secondary structures for jet engines, large and regional transport aircraft, military aircraft, Unmanned Aerial Vehicles (UAVs commonly referred to as “drones”), business jets, general aviation aircraft and rotary wing aircraft. Park also offers specialty ablative materials for rocket motors and nozzles and specially designed materials for radome applications. As a complement to Park’s advanced composite materials offering, Park designs and fabricates composite parts, structures and assemblies and low volume tooling for the aerospace industry. Target markets for Park’s composite parts and structures (which include Park’s proprietary composite SigmaStrut™ and AlphaStrut™ product lines) are, among others, prototype and development aircraft, special mission aircraft, spares for legacy military and civilian aircraft and exotic spacecraft.

The Company’s fiscal year is the 52- or 53-week period ending the Sunday nearest to the last day of February. The 2022, 2021 and 2020 fiscal years ended on February 27, 2022, February 28, 2021 and March 1, 2020, respectively. The 2022, 2021 and 2020 fiscal years each consisted of 52 weeks. Unless otherwise indicated in this Discussion and Analysis, all references to years and quarters in this Discussion and Analysis are to the Company’s fiscal years and fiscal quarters and all annual and quarterly information in this Discussion and Analysis is for such fiscal years and quarters, respectively.

2022 Financial Overview

In 2019, the Company announced the major expansion of its aerospace manufacturing, development and design facilities located at the Newton City-County Airport in Newton, Kansas.  This expansion includes the construction of a manufacturing facility located adjacent to Park’s existing Newton, Kansas facilities.  This facility, which was constructed in part to support a major aerospace customer, includes approximately 90,000 square feet of manufacturing and office space, and essentially doubled the size of Park’s existing Newton, Kansas manufacturing footprint.  The total cost of the expansion will be approximately $19.5 million. The expansion construction is complete and is undergoing customer qualifications, which are expected to be complete in the second half of the 2022 fiscal year.  The expansion includes new resin mixing and delivery systems, new hot-melt film and tape manufacturing lines, space to accommodate an additional hot-melt tape line or solution treating line, space to accommodate a confidential joint development project with a major aerospace customer, additional slitting capability, significant additional freezer and storage space, an expanded production lab, a new R&D lab and additional office space. Through February 27, 2022, the Company had incurred $18.7 million of costs for the expansion.

In December 2019, a novel strain of coronavirus was reported in Wuhan, China and has since spread worldwide, including to the United States, posing public health risks that have reached pandemic proportions (the “COVID-19 Pandemic”).

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The COVID-19 Pandemic and resultant global economic crisis had significant impacts on the Company’s results of operations and cash flow for 2021, and to a lesser degree for 2022. The COVID-19 Pandemic and crisis had significant impacts on the markets the Company sells into, particularly the commercial and business aircraft markets. As a result, the Company has experienced a significant reduction in sales and backlog.

Even as the COVID-19 Pandemic subsides, the Company may continue to experience adverse impacts to its business as a result of the potential continuing impact of the economic crisis on the markets the Company serves.

The Company's total net sales worldwide in 2022 were 16% higher than in 2021 due primarily to the higher sales to commercial aerospace and business aircraft customers due to the decreasing impacts of the Pandemic on those markets partially offset by lower military sales during 2022.

The Company’s gross profit margin, measured as a percentage of sales, increased to 33.4% in 2022 from 28.5% in 2021. Higher sales and production levels combined with the fixed nature of certain overhead costs led to higher gross margins.

The Company recorded restructuring charges of $259,000 and $1.6 million in 2022 and 2021, respectively, related to the closure of the Company’s Park Aerospace Technologies Asia, Pte, Ltd. facility located in Singapore.

The Company’s earnings from continuing operations in 2022 were 107% higher than in 2021, primarily as a result of the aforementioned increases in sales and gross profit. The Company’s net earnings from continuing operations in 2022 were 63% higher than in 2021, primarily due to higher sales and lower restructuring charges, partially offset by lower interest income.

The Company is experiencing inflation in raw material and other costs. The impact of inflation on the Company’s profits has been partially mitigated by the Company’s ability to adjust pricing for a large portion of its sales to pass the impact of inflation through to its customers.

With the recovery of the aerospace markets, some companies in the aerospace supply chain may not be fully prepared to ramp up their production as quickly as needed, which may create a risk to the Company of not getting enough raw materials on a timely basis to fully support the Company’s customers’ demands. Additionally, some shipments from overseas suppliers are experiencing transportation delays due to a lack of available containers and a backlog at incoming ports of entry. Delays of overseas shipments of raw materials are having an impact on the Company’s production levels. Delays in raw material shipments continue to represent a risk to the Company.

Programs that the Company supplies into may also be experiencing supply chain issues from other suppliers to the programs. The Company’s sales could be impacted by delays and reductions in its customer’s production schedules caused by other suppliers in the chain.

The tight labor market has created challenges in hiring personnel. Although the Company feels very positive about its workforce, high wage inflation creates challenges in hiring to add to the Company’s employee base. The Company is making adjustments to pay levels and benefits to stay competitive with the labor market.  Additionally, the Company has a “Customer Flexibility Program” whereby employees can cross train on different equipment and processes to earn extra pay for attaining the added skills.

The war in Ukraine has not had a material impact on the Company’s results of operations, and is not expected to have a material impact. The Company does not have any significant customers in Russia or Ukraine. The Company continues to evaluate the impact the war in Ukraine may have on the Company’s customers and on the Company’s supply chain.

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The war in Ukraine has not had a material impact on the Company’s results of operations, and is not expected to have a material impact. The Company does not have any significant customers in Russia or Ukraine.  The Company continues to evaluate the impact the war in Ukraine may have on the Company’s customers and on the Company’s supply chain.

Results of Operations:

2022 Compared to 2021

Net Sales

The Company's total net sales worldwide in 2022 were 16% higher than in 2021 due primarily to the higher sales to commercial aerospace and business aircraft customers resulting from the decreasing impacts of the Pandemic on those markets, partially offset by lower military sales during 2022.

Gross Profit

The Company’s gross profit margin, measured as a percentage of sales, increased to 33.4% in 2022 from 28.5% in 2021. Higher sales and production levels combined with the fixed nature of certain overhead costs led to higher gross margins.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $136,000, or 2%, during 2022 compared to 2021. Such expenses, measured as percentages of sales, were 11.7% and 13.2% during 2022 and 2021, respectively.

Selling, general and administrative expenses in 2022 included $285,000 of stock option expenses compared to $191,000 of such expenses in 2021.

Restructuring Charges

The Company recorded restructuring charges of $259,000 in 2022 compared to $1.6 million in 2021 related to the closure of the Company’s Park Aerospace Technologies Asia, Pte, Ltd. facility located in Singapore.

Earnings from Continuing Operations

For the reasons set forth above, the Company’s earnings from continuing operations were $11.4 million for 2022, including the pretax charges of $259,000 for the closure of the facility located in Singapore. The Company’s earnings from continuing operations were $5.5 million for 2021, including the pretax charges of $1.6 million for the closure of the facility located in Singapore.

Interest and Other Income

Interest and other income were $375,000 and $1.8 million for 2022 and 2021, respectively. The decrease from 2021 was due primarily to lower average invested cash during the period and lower weighted average interest rates. During 2022 and 2021, the Company earned interest income principally from its investments, which were primarily in short-term instruments and money market funds.

Income Tax Provision

The Company’s effective income tax rate of 28.2% for 2022 was due primarily to the U.S. Federal rate and state income taxes. The Company’s effective income tax rate was higher in 2021, due to unfavorable adjustments to valuation allowances on state tax credits and a higher state effective tax rate in 2021.

Net Earnings from Continuing Operations

The Company’s net earnings from continuing operations for 2022 were $8.5 million, including the pretax charges of $259,000 for the closure of the facility located in Singapore. The Company’s net earnings from continuing operations for 2021 were $5.2 million, including the pretax charges of $1.6 million for the closure of the facility located in Singapore.

Discontinued Operations

On December 4, 2018, the Company completed the sale of its Electronics Business, including manufacturing facilities in Singapore, France, California and Arizona and R&D facilities in Singapore and Arizona, to AGC Inc. for an aggregate purchase price of $145 million in cash, subject to post-closing adjustments for changes in working capital compared to the target net working capital, excluding cash in certain acquired subsidiaries and certain accrued and unpaid taxes of certain acquired subsidiaries. See Note 12, “Discontinued Operations”, of the Notes to Consolidated Financial Statements elsewhere in this Report for additional information on the sale.

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The operating results of the Electronics Business are classified, together with certain costs related to the sale, as discontinued operations, net of tax, in the Consolidated Statements of Operations.

The Company’s loss from discontinued operations was lower in 2022 compared to 2021 primarily as a result of exiting the facility in Fullerton California, previously used in the electronics operations, at the beginning of the third fiscal quarter of 2021.

Basic and Diluted Earnings Per Share

Basic and diluted earnings per share from continuing operations for 2022 were $0.41, including the pretax charges for the closure of the facility located in Singapore, compared to basic and diluted earnings per share for 2021 of $0.25, including the pretax charges for the closure of the facility located in Singapore. The net impact of the items described above was to decrease basic and diluted earnings per share by $0.01 in 2022 and $0.07 in 2021.

2021 Compared to 2020

Net Sales

The Company's total net sales worldwide in 2021 were 23% lower than in 2020 due primarily to the lower sales to commercial aerospace and business aircraft customers as a result of the inverse impact of the COVID-19 Pandemic on those markets, partially offset by higher military sales during 2021.

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Gross Profit

The Company’s gross profit margin, measured as a percentage of sales, decreased to 28.5% in 2021 from 31.1% in 2020. Lower sales and production levels combined with the fixed nature of certain overhead costs lead to lower gross margins.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $1.8 million, or 23%, during 2021 compared to 2020. Such expenses, measured as percentages of sales, were 13.2% during both the 2021 and 2020 fiscal years. The decrease in such expenses in 2021 was due primarily to decreased travel and entertainment, salaries and lower stock option expenses, excluding stock option modification charges in 2020.

Selling, general and administrative expenses in 2021 included $0.2 million of stock option expenses compared to $0.7 million of such expenses in 2020, including $0.2 million due to the modification of previously granted stock options.

Restructuring Charges

The Company recorded restructuring charges of $1.6 million in the 2021 related to the closure of the Company’s Park Aerospace Technologies Asia, Pte, Ltd. facility located Singapore.

Earnings from Continuing Operations

For the reasons set forth above, the Company’s earnings from continuing operations were $5.5 million for 2021, including the pretax charges of $1.6 million for the closure of the facility located in Singapore. The Company’s earnings from continuing operations were $10.7 million in 2020, including a pre-tax stock option modification charge of $0.2 million resulting from the special dividend of $1.00 per share paid in February 2020.

Interest and Other Income

Interest and other income were $1.8 million and $3.3 million for 2021 and 2020, respectively. The decrease from 2020 was due primarily to lower average invested cash during the period and lower weighted average interest rates. During 2021 and 2020, the Company earned interest income principally from its investments, which were primarily in short-term instruments and money market funds.

Income Tax Provision

The Company’s effective income tax rate of 28.7% for 2021 was due primarily to the U.S. Federal rate and state income taxes. The Company’s effective income tax rate was lower in 2020, due to favorable adjustments to valuation allowances on state tax credits and a lower state effective tax rate in 2020.

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Net Earnings from Continuing Operations

The Company’s net earnings from continuing operations for 2021 were $5.2 million, including the pretax charges of $1.6 million for the closure of the facility located in Singapore. The Company’s net earnings from continuing operations for 2020 were $10.2 million, including the stock option modification pre-tax charge of $0.2 million in connection with the special dividend of $1.00 per share paid in February 2020.

Discontinued Operations

On December 4, 2018, Park completed the previously announced sale of its Electronics Business, including manufacturing facilities in Singapore, France, California and Arizona and R&D facilities in Singapore and Arizona, to AGC Inc. for an aggregate purchase price of $145 million in cash, subject to post-closing adjustments for changes in working capital compared to the target net working capital, excluding cash in certain acquired subsidiaries and certain accrued and unpaid taxes of certain acquired subsidiaries. See Note 12, “Discontinued Operations”, of the Notes to Consolidated Financial Statements elsewhere in this Report for additional information on the sale.

The operating results of the Electronics Business are classified, together with certain costs related to the sale, as discontinued operations, net of tax, in the Consolidated Statements of Operations.

The Company’s loss from discontinued operations was lower in 2021 compared to 2020 primarily as a result of exiting the facility in Fullerton California, previously used in the electronics operations, at the beginning of the Company’s third fiscal quarter of 2021.

Basic and Diluted Earnings Per Share

Basic and diluted earnings per share from continuing operations for 2021 were $0.25, including the pretax charges for the closure of the facility located in Singapore, compared to basic and diluted earnings per share for 2020 of $0.50, including the stock option modification charge in connection with the special dividend paid in February 2020. The net impact of the items described above was to decrease basic and diluted earnings per share by $0.07 in 2021 and $0.01 in 2020.

Liquidity and Capital Resources:

Cash and Marketable Securities

The Company believes it has sufficient liquidity to fund its operating activities for the 12 months from the date of the filing of this Form 10-K Annual Report and for the foreseeable future thereafter.

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The change in cash and marketable securities at February 27, 2022 compared to February 28, 2021 was primarily the result of positive operating cash flow more than offset by capital expenditures and regular quarterly dividends paid by the Company to its shareholders during 2022 and a number of additional factors. The significant changes in cash provided by operating activities were as follows:

In addition, the Company paid $8.2 million in cash dividends during 2022 and 2021.

Working Capital

Working capital at February 27, 2022 was lower compared to February 28, 2021. Decreases in cash and cash equivalents and marketable securities, decreases in inventories and decreases in prepaid expenses and other current assets were partially offset by increases in accounts receivable and decreases in accounts payable, accrued liabilities and income taxes payable.

The Company's current ratio (the ratio of current assets to current liabilities) was 20.1 to 1 at February 27, 2022 compared to 16.6 to 1 at February 28, 2021.

Cash Flows

During 2022, the Company's net earnings from continuing operations, before depreciation and amortization, stock-based compensation, amortization of bond premium, gain on sale of fixed assets and non-cash restructuring, were $11.8 million. Such earnings were decreased by changes in operating assets and liabilities of $3.6 million, resulting in $8.2 million of cash provided by operating activities from continuing operations. During 2022, the Company expended $4.4 million for the purchase of property, plant and equipment compared to $7.5 million during 2021, the Company in 2021 paid $1.6 million for the repurchase of the Company’s stock, and the Company paid $8.2 million in cash dividends in 2022 and 2021.

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Other Liquidity Factors

On December 22, 2017, the U.S. government enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (“TCJA” or “Tax Act”) and significantly revised U.S. corporate income tax by, among other things, lowering corporate income tax rates, imposing a one-time transition tax on deemed repatriated earnings of non-U.S. subsidiaries, and implementing a territorial tax system. As a result of the Tax Act, the Company recorded tax payable to be paid in installments over eight years. The remaining balance of these installment payments, as of February 27, 2022, was approximately $14.3 million to be paid over the next four years.

The Company believes that its existing cash, cash equivalents and marketable securities, and cash flow from operations will be sufficient to fund necessary capital expenditures and operating cash requirements for at least the next twelve months from the date of the filing of this Form 10-K Annual Report. The Company further believes that its balance sheet and financial position to be very strong, and the Company believes it is well positioned to weather the impact of the Pandemic on its business.

Contractual Obligations:

The Company's contractual obligations and other commercial commitments to make future payments under contracts, such as lease agreements, consist only of operating lease commitments, commitments to purchase raw materials and commitments to purchase equipment, as described in Note 10 of the Notes to Consolidated Financial Statements included elsewhere in this Report. The Company has no other long-term debt, capital lease obligations, unconditional purchase obligations or other long-term obligations, standby letters of credit, guarantees, standby repurchase obligations or other commercial commitments or contingent commitments, other than two standby letters of credit in the total amount of $0.3 million to secure the Company's obligations under its workers’ compensation insurance program.

Environmental Matters:

The Company is subject to various Federal, state and local government and foreign government requirements relating to the protection of the environment. The Company believes that, as a general matter, its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and that its handling, manufacture, use and disposal of hazardous or toxic substances are in accord with environmental laws and regulations. However, mainly because of past operations of the Company’s former Electronics Business and operations of predecessor companies, which were generally in compliance with applicable laws at the time of the operations in question, the Company, like other companies engaged in similar businesses, is a party to claims by government agencies and third parties and has incurred remedial response and voluntary cleanup costs associated with environmental matters. Additional claims and costs involving past environmental matters may continue to arise in the future. It is the Company's policy to record appropriate liabilities for such matters when remedial efforts are probable and the costs can be reasonably estimated.

In 2022, 2021 and 2020, the Company incurred approximately $13,000, $9,000 and $41,000, respectively, for remedial response and voluntary cleanup costs and related legal fees, and the Company received, or expects to receive, reimbursement pursuant to general liability insurance coverage for approximately $13,000, $9,000 and $38,000, respectively, of such amounts. While annual environmental remedial response and voluntary cleanup expenditures, including legal fees, have generally been constant from year to year, and may increase over time, the Company expects it will be able to fund such expenditures from cash flow from operations. The timing of expenditures depends on a number of factors, including regulatory approval of cleanup projects, remedial techniques to be utilized and agreements with other parties. At February 27, 2022 and February 28, 2021, there were no amounts recorded in accrued liabilities for environmental matters.

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Management does not expect that environmental matters will have a material adverse effect on the liquidity, capital resources, business, consolidated results of operations or consolidated financial position of the Company. See Note 11 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report for a discussion of the Company's contingencies, including those related to environmental matters.

Critical Accounting Policies and Estimates:

The following information is provided regarding critical accounting policies that are important to the Consolidated Financial Statements and that entail, to a significant extent, the use of estimates, assumptions and the application of management's judgment.

General

The Company's Discussion and Analysis of its Financial Condition and Results of Operations are based upon the Company's Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these Consolidated Financial Statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to sales allowances, allowances for doubtful accounts, inventories, valuation of long-lived assets, income taxes, restructurings, contingencies and litigation, and employee benefit programs. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements.

Recently Adopted Accounting Pronouncement

See Note 15 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report for a discussion of the Company's recently adopted accounting pronouncements.

Revenue Recognition

The Company recognizes revenue when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the providing entity expects to be entitled in exchange for those goods or services. We recognize revenue when all of the following criteria are met: (1) we have entered into a binding agreement, (2) the performance obligations have been identified, (3) the transaction price to the customer has been determined, (4) the transaction price has been allocated to the performance obligations in the contract, and (5) the performance obligations have been satisfied. The majority of the Company’s shipping terms define the performance obligation to be satisfied upon shipment.

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Sales Allowances and Product Warranties

The Company records estimated reductions to revenue for customer returns, allowances, and warranty claims. Provisions for such reductions are recorded in the period the sale is recorded and are derived from historical trends and other relevant information. The Company’s products are made to customer specifications and tested for adherence to such specifications before shipment to customers. Composite structures and assemblies may be subject to “airworthiness” acceptance by customers after receipt at the customers’ locations. There are no future performance requirements other than the products’ meeting the agreed specifications. The Company’s basis for providing sales allowances for returns are known situations in which products may have failed due to manufacturing defects in the products supplied by the Company. The Company is focused on manufacturing the highest quality advanced composite materials, structures and assemblies and tooling possible and employs stringent manufacturing process controls and works with raw material suppliers who have dedicated themselves to complying with the Company’s specifications and technical requirements. The amounts of returns and allowances resulting from defective or damaged products have averaged approximately 1.0% of sales for the Company’s last three fiscal years.

Accounts Receivable

The Company’s accounts receivable are due from purchasers of the Company’s products. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are due within established payment terms and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than established payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the conditions of the general economy and the aerospace industry. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company writes off accounts receivable when they become uncollectible.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. The Company writes down its inventory for estimated obsolescence or unmarketability based upon the age of the inventory and assumptions about future demand for the Company's products and market conditions.

Valuation of Long-Lived Assets

The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. In addition, the Company assesses the impairment of goodwill at least annually. Important factors that could trigger an impairment review include, but are not limited to, significant negative industry or economic trends and significant changes in the use of the Company’s assets or strategy of the overall business.

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Income Taxes

As part of the processes of preparing its consolidated financial statements, the Company is required to estimate the income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s Consolidated Balance Sheets. Deferred income taxes are provided for temporary differences in the reporting of certain items, such as depreciation and undistributed earnings of foreign subsidiaries, for income tax purposes compared to financial accounting purposes. In evaluating the Company’s ability to recover the deferred tax assets within the jurisdiction from which they arise, all positive and negative evidence is considered, including the scheduled reversal of deferred tax liabilities, projected future taxable income, tax planning strategies and results of recent acquisitions. If these estimates and assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets, resulting in additional income tax expense in the Company's Consolidated Statements of Operations, or conversely to further reduce the existing valuation allowance, resulting in less income tax expense. The Company evaluates the realizability of the deferred tax assets and assesses the need for additional valuation allowances quarterly.

Tax benefits are recognized for an uncertain tax position when, in the Company’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances and when new information becomes available. Such adjustments are recognized entirely in the period in which they are identified. The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by the Company. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes its liability for unrecognized tax benefits is adequate. Interest and penalties recognized on the liability for unrecognized tax benefits are recorded as income tax expense.

Contingencies and Litigation

The Company is subject to a number of proceedings, lawsuits and other claims related to environmental, employment, product and other matters. The Company is required to assess the likelihood of any adverse judgments or outcomes in these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach, such as a change in settlement strategy in dealing with these matters.

Employee Benefit Programs

The Company's obligations for workers' compensation claims prior to fiscal year 2019 are effectively self-insured, although the Company maintains individual and aggregate stop-loss insurance coverage for such claims. Beginning in fiscal year 2019 workers compensation claims were fully insured. The Company accrues its workers’ compensation liability based on estimates of the total exposure of known claims using historical experience and projected loss development factors less amounts previously paid out.

The Company has a non-contributory profit sharing retirement plan covering their regular full-time employees. In addition, the Company has various bonus and incentive compensation programs, most of which are determined at management's discretion.

The Company's reserves associated with these self-insured liabilities and benefit programs are reviewed by management for adequacy at the end of each reporting period.

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